Eight years ago, I saw the need for a community bank that could help unlock the enormous economic potential of underserved communities across the L.A. basin, so I led the formation of this state’s first Hispanic-owned business bank in two generations. Prior to that, as California secretary of business, transportation and housing, my driving purpose was to stimulate economic growth across our state. I saw daily evidence of the critical role that small businesses play in lifting up entire communities and putting Californians back to work.
This April, I was given an opportunity I never expected to serve in President Barack Obama’s Cabinet as the leader of the Small Business Administration and a voice for America’s entrepreneurs. My charge in Washington is to apply the lessons I’ve learned here in California as an entrepreneur, a bank regulator and a bank co-founder to help more banks get to “yes” when Main Street business owners walk through their doors.
The SBA plays a unique role in supporting small businesses by promoting the Three C’s: capital, counseling and contracts. Our agency provides affordable capital to help companies start up or scale up. Our national network of business consultants offers free counseling to help entrepreneurs plan, hire and grow. And our specialists facilitate access to contracts – federal, corporate and international – to take small businesses to the next level.
We know that small businesses have led our nation’s economic recovery. Entrepreneurs are creating nearly two out of every three private-sector jobs in America. Federal Reserve Chairwoman Janet Yellen credited small businesses for much of the investment and hiring that powered our economic recovery after the financial crisis and credit freeze.
But in the recession’s aftermath, too many entrepreneurs are struggling to access capital on reasonable terms. That’s why the SBA matters. We fill market gaps. We support loans to small-business owners with good credit and good business plans that do not qualify for conventional bank loans. Every dollar of capital approved through SBA lending is money that would otherwise stay on the sidelines.
Here in Los Angeles, we’ve witnessed something remarkable happen over the past year. SBA has made it considerably easier for banks to join our network and increase their lending activity. We’ve accomplished this by zeroing out fees on small loans and by allowing banks to use their own forms, documents and procedures on the SBA Express lending platform. As a result, banks today can approve a $150,000 loan with an 85 percent government guarantee, while paying no fees and using their own closing documentation. This is not your grandfather’s SBA.
Perhaps no city in America has benefited from these reforms more than Los Angeles, which leads the nation in SBA loan volume and dollar value, ranking in the top five in small loans of $150,000 or less. Smaller loans are lifelines to minority communities; four out of every five SBA loan applications from Hispanic-American and African-American entrepreneurs are for $150,000 or less. A study by the Urban Institute found that women and minorities are three to five times more likely to be approved for an SBA-backed loan than a traditional bank loan. In other words, if the SBA doesn’t get capital to these entrepreneurs, often no one will.
Loans up
Since October, SBA small-dollar loans are up 67 percent across Los Angeles, Ventura and Santa Barbara counties. Over that span, we’ve seen a corresponding surge in SBA lending to startups (up 24 percent), veteran-owned businesses (up 34 percent) and minority entrepreneurs (up 46 percent).
Additional reforms will enable us to build on this progress. This summer, two months into my SBA tenure, I implemented a predictive credit scoring model that combines a borrower’s personal and business credit scores. It can cut the time and cost in half for banks to make small-dollar loans.
Next year, we’ll take another major step to bring the SBA into the 21st century by getting rid of anachronistic fax machines and mountains of paperwork through our transformative SBA One initiative. SBA One is a single online portal that will serve as a one-stop shop for eligibility, underwriting, closing, loan modification, servicing and purchase. It will automate the upload of documents, the generation of forms, credit scoring and electronic signatures. If consumers can get a decision on a credit card application in a matter of minutes, we should be able to do the same for them on small-dollar business loans.
SBA lenders offer a full suite of products across the capital continuum, including microloans of less than $50,000 (with free technical assistance), working-term capital loans, revolving lines of credit, real estate loans that enable entrepreneurs to purchase their own building as well as export loans to go global.
Through our Small Business Investment Company program, we provide matching dollars to 290 professionally managed investment funds that offer patient mezzanine capital to help our most promising small businesses expand. The SBA even runs the world’s largest technology seed fund, the Small Business Innovation Research program, which allocates federal grants on a competitive basis to small innovators to help level the R&D playing field with larger corporations.
We’re determined to continue SBA modernization efforts until our products are in the DNA of the entire California lending community. When financial institutions and their government work together to share risk and counsel borrowers, new enterprises succeed and small businesses get bigger. Nike, Staples, FedEx, Ben & Jerry’s, Under Armour and Outback Steakhouse were all once small businesses until they found an SBA lender to work with them. We’re committed to continuing our progress, knowing the next great American success story could be one “yes” away.
SBA Administrator Maria Contreras-Sweet is a member of President Barack Obama’s Cabinet and a former California secretary of business, transportation and housing.
